Select Income REIT (NYSE:SIR), a real estate investment trust (REIT) with a focus on net leasing properties to single tenants, is in the process of reviewing a presentation made by Lakewood Capital Management LP to their board of directors.
As we reported on Friday, it was recently revealed in a filing with the SEC that Lakewood had upped their stake in Select Income to 5%, owning 3.01 million common shares of their stock. In addition, Lakewood has economic exposure to an additional 944,000 shares through cash-settled total return swap agreements with both Credit Suisse First Boston and Morgan Stanley. That brings the total amount of shares Lakewood has economic exposure to up to 3.94 million, or 6.6% of all shares.
It didn’t take long for Lakewood, managed by Anthony Bozza, to take advantage of their new activist shareholder position, nor was it a surprise. The investment firm, which was founded in 2007 and currently has over $3 billion in assets under management (AUM), often seeks long-term value-oriented partnerships, and has shown an ability to generate strong returns on their investments.
In their presentation to the board, Lakewood emphasized that deficiencies within the operating structure and governance of Select Income, with whom they’ve been a shareholder of since shortly after that company’s IPO in March 2012, are preventing it from reaching its full potential. They believe the company’s shares are severely underperforming, and should be trading 30% to 70% higher than they currently are.
It is Lakewood’s position that they, and many of Select Income’s other shareholders and investors have lost confidence in the company’s governance. Lakewood took particular aim at Barry and Adam Portnoy, who they claim have taken “multiple steps to protect their own interests at the expense of shareholders in clear breach of their fiduciary duties.”
Among other things, they cite in their presentation an aggressive expansion that has diluted the value of Select Income’s once-strong Hawaii properties, that the company used Bad Faith Tactics to ensure an amendment to remove the three-year staggered terms for board trustees did not pass, and that the concerns raised in a shareholder letter they presented in June 2014 were ignored.
Lakewood seeks to have William H. Lenehan, an independent real estate professional appointed to the board. Lenehan was initially nominated by Lakewood on December 5, and currently serves on the boards of three other public companies, two of them also in the real estate business, and has experience in net leased properties.
Select Income announced today that they were in the process of reviewing the presentation, and that they would file their proxy statement in regards to the trustee nomination in due course. The potential nomination of a new board member comes just two weeks before Select Income shareholders are scheduled to vote on and finalize their deal to purchase Cole Corporate Income Trust for $3 billion in cash or Select Income stock. That deal was first announced in September.
Select Income’s stock is up just under 2% today in afternoon trading on the news of Lakewood’s presentation. The stock now stands at $26.53. The stock hit a 52-week low in late November before a strong rebound over the past 6 weeks. However the stock is still down 2.64% over the past year, and has severely underperformed in comparison to its peers.
In contrast to Lakewood’s report, many analysts are divided on the prospects of Select Income’s stock (though due to those governance issues Lakewood seeks to remedy). Zack’s has an outperform rating and $29.50 price target on it, while RBC Capital has a comparable $29.00 price target. Hartley’s Research has the stock rated as a “buy”, while Bank of America has an underperform rating for the stock.
Investor sentiment has been positive to the news of Lakewood’s involvement, which emphasizes the importance of monitoring the activity of investment funds and their acquisition of company’s stock. Lakewood brings a strong track record into play, with their returns having exceeded the S&P 500 Index by 60.5% since their inception, as of the end of 2014.
The full presentation is available below:
Lakewood Capital Management Presentation on SIR
Disclosure: None
